KPIs can help identify the weak links in the supply chain so that action can be initiated to enhance performance because the chain is affected by its weakest link, according to Prem Vrat, Ph.D., pro-chancellor and professor of eminence and chief mentor at The Northcap University, in India.
These weak links are a primary concern for companies, according to a new Global State of Quality research study by ASQ, the global network of quality improvement professionals, and APQC, a global leader in business benchmarking and best practices. More than 50 percent of the nearly 1,700 respondents from companies across more than 20 countries found that supply chain disruptions are their most concerning risk.
But measurements that help identify disruptions must be tied to the drivers of the company, according to Janet Raddatz, vice president of quality and food safety systems at Sargento Foods in Wisconsin.
“The objective, really, is to find out what you’re not doing well and fix it,” she said. “You want to identify what impacts your business and what’s costing you.”
So how can an organization best select and implement KPIs that improve operational performance and drive business strategy? Let’s examine two distinct types of KPIs tied to process efficiency and cost effectiveness.
Process efficiency KPIs are an important group of indicators that help measure the performance of any supply chain organization. Due to the complexity of a cross-functional, cross-enterprise supply chain, process efficiency indicators will allow organizations to measure their efficiency performance internally and externally. To properly manage the supply chain, a series of process efficiency KPIs are needed to uncover performance improvement opportunities. Listed below are a few specific KPIs commonly used across supply chains to measure quality of products, quality of processes and quality of design, all to detect and minimize company risks and improve customer experience.
Finished-product, first-pass quality yield for primary products
Finished-product, first-pass quality yield is an important KPI to monitor the quality and performance of the supply chain. First-pass yield measures how many units are completed in the first pass through each and every step in the supply chain with no rework. If an organization decides not to measure final-product, first-pass yield, it risks high levels of process inefficiency and waste. First-pass yield helps companies capture and identify high-waste and low-efficiency areas for process improvement and additional monitoring.
“The key to this metric is not how well the product or service is built, but can supply chain play a role in positively influencing the manufacturing process?” said Jeff Varney, APQC’s business and performance management practice lead. “Can the supply chain organization source and provide high-quality products that lead to first-pass approval for key products within the product portfolio?”
Percentage of defective parts per million
Percentage of defective parts per million is a KPI that measures the amount of defective parts out of total parts produced. This KPI focuses on the quality of the process and output before the product or unit is shipped. In most supply chains, defective parts per million should be tracked on some form of control chart with an upper and lower limit — essentially, the expectation of how well the supply chain should operate. Defective parts per million is often used in process improvement initiatives as a stake in the ground for performance.
The supply chain group has to make sure they are sourcing the right parts to decrease the overall number of defective parts. Additionally, the supply chain team needs to understand how many of those defective parts were a result of the assembly of defective parts or bad materials versus the incorrect use of part. The triage continues from there to understand whether a supplier of a part continues to have a defective part over time or if there is a different issue at hand. Based upon that analysis, then the organization has to decide if it makes sense to start looking at a more expensive supplier to justify having lower defective parts per million.
Warranty costs (repair and replacement) as a percentage of sales
Warranty costs as a percentage of sales compares the cost spent on repairs and replacement of distributed units to sales. This metric focuses on the amount of units that are defective after distribution to the customer — rather than in process. The warranty costs KPI can be used to track the effectiveness of the quality control group as well as the quality of product being produced. Warranty being one area of cost of quality, it should not be the only area measure related to sales. Measuring quality for sales as well as quality for cost will help predict customer-purchasing behavior, according to a 2015 ASQ Future of Quality Report.
Warranty costs can have a huge impact on organizations. The parts being supplied might not be meeting the needs of the business, and ultimately the consumer. It is up to the leadership of the supply chain team to verify that the supplier or partner can meet the requirements of the component, and the requirements of the business. The goal is to minimize the costs of warranty support by procuring parts that are manufactured, shipped, and transported correctly to avoid damage, as an example. Although the quality and manufacturing groups normally monitor the warranty costs and reasons for the costs, the supply chain organization also has a major role in reducing warranty costs.
According to the Global State of Quality 2 data, 26 percent of respondents have reported issues with overall cost of quality, including recalls, counterfeit, product defects, food safety, and supply shortage. Furthermore, 46 percent of respondents reported product defects as a quality-related issue.
Cost-effectiveness key performance indicators
Cost-effectiveness KPIs are another important group of indicators that help measure the performance of any supply chain organization. Cost indicators allow for an organization to better manage and measure their cost-effectiveness performance, both internally and externally. As with process efficiency indicators, this is not an exhaustive list of metrics. To properly manage the supply chain, a series of KPIs is required to accommodate their respective shortcomings. Too many KPIs will also dilute the effectiveness of your ability to work the critical issues and make improvements where it matters. Choose carefully!
Scrap and rework costs as a percentage of sales
The scrap and rework cost indicator measures the quality of and waste in the supply chain process. This KPI will be tied inherently to other process efficiency indicators, such as defective parts per million, as it measures the cost of poor quality. In any supply chain organization, a poorly managed process can lead to increased scrap and rework costs. When defining this KPI, an organization must have properly scoped the process—as well as identified any shadow processes (undocumented processes completed by individual actors). Scrap and rework costs can be reduced by systematically fixing a problem where an error originates.
“Scrap and rework are challenging for any organization,” Varney said. “Think about when you drive by a new house being built, and the pile of scrap wood that is piled up during construction — that is all waste for a variety of reasons. However, what if one of those reasons is that the wrong size of lumber was ordered, and the on-site team had to modify the wood to make it work? This is where the role of the supply chain comes in — to make sure that the delivery of goods are the pieces or parts that are required for the job. This not only drives the needs of a specific line of business, but supports the overall needs of the business.”
The Global State of Quality 2 data indicates that waste reduction is also on the minds of survey participants. Almost 55 percent of the respondents use waste reduction as a way to drive profitability.
Total cost of quality per $100,000 in revenue
The cost of quality is a very important KPI to ensure cost-effectiveness. Cost of quality has two components: the cost of good quality and the cost of poor quality. Specifically, companies must pay to ensure good quality is consistent through quality inspection activities, prevention mechanisms, and other quality control vehicles. In addition, companies must also pay for the cost of poor quality when a defect exists or the output does not meet requirements. Therefore, the real question is “What is the cost of poor quality? Which then flows into questions like, how much am I spending versus how much am I avoiding? And how do higher-quality supply chain practices drive a higher profit margin for the business?”
Understanding the root cause of defects can point to where a company is spending effectively or not. For example, pointing to a supplier because a part doesn’t fit could be because the design is poor and there is no feedback from the KPIs in the supply chain back to design. Creating that bridge between design and the supply chain is critical. Another area to pay attention to is tier 2 and 3 level suppliers. To drive a culture of quality beyond just their own organization, leading companies are training tiers of suppliers, but that accounts only for 33 percent of manufacturing companies and 25 percent of service providers that train tier 2 suppliers, according to the Global State of Quality 2 Research: Discoveries 2016 report.
Improving use of effective KPIs within supply chain management
Organizations that currently don’t measure their supply chain effectiveness should identify the right KPIs relevant to the nature of their business and the dynamics of external business environment, according to Vrat. “This can be done either by benchmarking with the role models in their class (or) adapting to the specifics of the given situation,” he said.
But identifying effective metrics and fixing poor performance is only part of implementing KPIs in supply chain. Your KPIs need to be in line with the goals of your customers, according to Raddatz.
“It’s difficult, but the KPIs from all participants in a supply chain have to be aligned,” she said.
Furthermore, and in an effort to fix what you’re not doing well, organizations need to identify the cost of poor quality to ensure they are spending resources on the issues that truly impact their customer experience and company objectives.
“You have to be able to measure (processes) to determine if it’s a problem, because, honestly, sometimes it’s not,” Raddatz said, adding that sometimes fixing an issue costs more than the issue itself. “Compare your measurement to the baseline to determine the effect on the business. In the end, minimizing waste is going to affect your bottom line.”
“And talk to the people on the floor, not just top management,” Raddatz said. “We encourage people to say something if they see something that could be improved. Employees have a lot of good ideas and they can help increase efficiencies and improve processes that need improving.”
Selecting the right KPIs, collaborating across the supply chain as well as with internal functions to take appropriate action will lead to a more competitive supply chain, positive customer experiences and a healthier business.
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